When you have worked hard to accumulate wealth, it is a priority to ensure it is available for younger heirs.
A generation-skipping trust (GST) is an estate planning tool designed with this goal in mind.
What are generation-skipping trusts?
This type of irrevocable trust allows you to deed assets to beneficiaries at least 37.5 years younger than you. The beneficiaries are most commonly grandchildren, but they can also be grand-nephews and grand-nieces, step-grandchildren and friends. The assets skip over the generation below you, usually your children.
How do generation-skipping trusts avoid estate taxes?
Assets valued at over $12.06 million as of 2022 are subject to taxation if left to your children after death. The estate tax is a hefty 40%, which quickly decreases the value of the assets.
Upon your children’s death, if they also leave the remaining assets to their children, the government charges an estate tax again. Essentially, by the time your grandchildren receive their portion of the assets, they will have paid taxes twice on the original estate. With a GST, the assets avoid the first round of estate taxes and instead get taxed according to the generation-skipping tax guidelines.
What other advantages do GSTs have besides lowering taxes?
If your children die with a large amount of debt or lawsuits, your grandchildren’s inheritance is safe in a generation-skipping trust. Since your children never have ownership of the assets in a GST, creditors cannot collect against it. The beneficiaries of the trust keep the total value of their assets.
Generation-skipping trusts are an excellent way to gift the highest possible value of your assets to your younger heirs.